Cartilage contains an extensive extracellular matrix and provides mechanical strength to resist compression in joints. Cartilage also serves as the template for the growth and development of most bones. ECM molecules, such as perlecan, link protein, aggrecan, and type II collagen, are expressed during chondrocyte differentiation. Mutations of these genes and regulatory factors result in impaired cartilage formation and malformation of the limbs, craniofacial bones, and appendicular skeleton. Cartilage formation is initiated by mesenchymal cell condensation to form primordial cartilage followed by chondrocyte differentiation, which includes resting, proliferative, prehypertrophic, and hypertrophic chondrocytes. As a final step in endochondral bone formation, hypertrophic cartilage is invaded by blood vessels and osteoblasts, and the calcified cartilage is subsequently replaced by bone. Thus, spatial and temporal regulation of chondrocyte differentiation is essential in determining the length and width of skeletal components. Transforming growth factor-beta (TGF-beta) and its related factors, including bone morphogenetic proteins (BMPs) and activins, regulate diverse cellular processes such as proliferation, differentiation, apoptosis, and extracellular matrix formation during embryogenesis. TGF-beta signaling is mediated by two types of transmembrane serine/threonine kinase receptors, type I (ALK5) and type II receptors, which form a heteromeric complex. In this signaling complex, following TGF-beta binding to the type II receptor, the type II receptor phosphorylates and activates ALK5. Activated ALK5 induces signaling cascades through Smad-dependent and Smad-independent pathways. In the Smad-dependent pathway, the TGF-beta receptor complex activates Smad2/3, whereas the BMP-receptor complex activates Smad1/5/8. TGF-beta is implicated in proliferation and differentiation of chondrocytes and osteoblasts. However, the in vivo function of TGF-beta in skeletal development is not clear, primarily because of its diverse activities and redundant expression of multiple TGF-beta proteins (TGF-beta1, -beta2 and -beta3). The TGF-beta type I receptor ALK5 is one of the most prominent receptors for TGF-beta family members in skeletal tissues. Deficiency of ALK5 should eliminate Smad-dependent and Smad-independent signaling for all TGF-beta isoforms and other potential TGF-beta superfamily proteins. To investigate the role of TGF-beta signaling in growth plate development, we have created conditional knockout mice in which ALK5 was inactivated in skeletal progenitor cells by Dermo1-Cre expression in mice, and tamoxifen-inducible Cre expression in vitro. Conditional ALK5 knockout (ALK5CKO) mice had short and wide long bones, reduced bone collars, and short trabecular bones. In ALK5CKO growth plates, chondrocytes proliferated and differentiated and cartilage was formed, but ectopic cartilaginous tissues protruded into the perichondrium at the ossification groove of Ranvier. In control growth plates, ALK5 protein was strongly expressed in the perichondrial progenitor cells surrounding cartilage, which eventually differentiated into osteoblasts. Mutant growth plates had an abnormally thin perichondrial cell layer as well as reduced proliferation and differentiation of osteoblasts. These defects in the perichondrium likely caused the short bones and ectopic cartilaginous protrusions in the growth plate. Using inducible ALK5-deficient primary calvarial cell cultures, we found that TGF-beta signaling promoted osteoprogenitor proliferation and early differentiation. We also found that it regulated commitment to the osteoblastic lineage through selective MAPK and Smad2/3 pathways. Our results have uncovered critical roles of TGF-beta signaling in perichondrium formation and differentiation, as well as in growth plate integrity during skeletal development. Although several factors, such as PTH/PTHrP, are also known to play an essential role in chondrocyte proliferation, it is still unclear how cell proliferation signals are turned off and a commitment to differentiation is made. In our search for a factor which regulates the transitional stage from proliferation to differentiation of skeletal progenitors, we found that pannexin3 (Panx3), a member of the recently identified pannexin gap junction family, performs such functions in chondrocyte differentiation. We demonstrated that Panx3 was strongly expressed in the prehypertrophic zone in the growth plate, where chondrocytes stop proliferation and differentiate into hypertrophic chondrocytes. Panx3 was induced during differentiation of the chondrogenic cell line ATDC5. Overexpression of Panx3 promoted ATDC4 cell differentiation, while suppression of endogenous Panx3 expression by shRNA inhibited that differentiation. We found that Panx3 inhibited PTH-mediated ATDC5 cell proliferation. In addition, Panx3 promoted release of ATP from ATDC5 cells to the extracellular space by its hemichannel activity, and this ATP release was inhibited by an antibody to the extracellular domain of Panx3. We also found that Panx3 expression reduced intracellular cAMP levels and the activation of CREB, a PKA downstream effector, which activates the genes necessary for proliferation. Our results suggest that Panx3 functions to switch the chondrocyte cell fate from proliferation to differentiation by regulating intracellular ATP/cAMP levels.